Key Takeaways
- Sophisticated LPs scrutinize multiple fund performance metrics to evaluate your track record, making accurate calculations crucial to winning over investors.
- Different fund strategies require emphasizing different metrics: core funds focus on cash-on-cash returns for stable income, while value-add and opportunistic funds prioritize IRR and yield on cost.
- Performance metrics are only credible when backed by quality data, transparent methodologies, and regular reporting. Adopting real-time dashboards and stress testing scenarios builds LP confidence and improves fundraising.
Many LPs won’t accept performance narratives at face value. Instead, they scrutinize funds by assessing key performance metrics. As a fund sponsor, mastering these metrics can help you demonstrate your track record and win over hesitant investors—especially when launching a real estate investment fund for the first time.
What are real estate fund performance metrics?
Real estate fund performance metrics measure a fund’s financial returns, risk, or value based on the amount of capital invested, time horizons, and market benchmarks. They’re what investors use to determine whether (and how much) to invest in a fund.
Categories of real estate fund performance metrics
Fund performance metrics can be categorized into four basic groups:
Return-based metrics
Return-based metrics measure an investment’s profitability over time, which includes both realized and unrealized gains (distributions and equity appreciation).
Risk-based metrics
Risk-based metrics measure an investment’s downside protection and volatility. They indicate how likely you are to lose money on an investment.
Income and cash flow metrics
Income and cash flow metrics measure how much you can expect in cash distributions relative to your initial investment (i.e., realized gains).
Valuation and growth metrics
Valuation metrics measure the current value of an investment. They’re often paired with growth metrics that show how the value of your investment has appreciated over time.
Core performance metrics every fund manager must know
Here are some core performance metrics that every fund manager should know:
| Definition | Purpose | |
| Internal rate of return (IRR) | An annualized return rate equal to the discount rate at which the net present value (NPV) of all cash flows equals zero | Accounts for the timing and size of cash flows, allowing better apples-to-apples comparisons between real estate investments |
| Equity multiple (EMx) | The total cash returned to investors divided by total equity invested (aka multiple on invested capital or MOIC) | Shows investors how many times their investment has been multiplied (regardless of time horizon) |
| Cash-on-cash return | The annual pre-tax cash flow distributed to investors relative to the total equity invested | Measures the annual income yield on capital without accounting for appreciation or exit proceeds |
| Net asset value (NAV) | The current market value of all fund assets minus liabilities | Represents the liquidation value of investors’ holdings |
| Total value to paid-in capital (TVPI) | The sum of all distributions and unrealized value divided by capital called from investors | Shows how much investors’ capital invested so far has been multiplied in realized and unrealized gains |
| Distributions to paid-in capital (DPI) | The cumulative cash distributions returned to investors divided by total capital called | Measures how much investors capital invested so far has been multiplied in realized gains only |
Specialized metrics for risk and operational efficiency
The following other performance metrics focus on risk and operational efficiency:
| Definition | Purpose | |
| Net operating income (NOI) | Total property revenue minus operating expenses (excluding debt service and capital expenditures) | Measures a property’s income on a property level (i.e., without factoring in financing and irregular capital expenditures) |
| Capitalization rate (cap rate) | Net operating income divided by property value or purchase price (expressed as a percentage) | Measures annual return on a property level, i.e., before accounting for financing |
| Loan-to-value (LTV) | Total loan amount divided by the appraised property value (expressed as a percentage) | Quantifies leverage to help sponsors (and lenders) assess a property’s financing risk |
| Debt service coverage ratio (DSCR) | Net operating income divided by total debt service (principal and interest payments) | Describes a property’s ability to cover its debt obligations with its operating cash flow |
| Operating expense ratio (OER) | Total operating expenses divided by gross operating income (expressed as a percentage) | Helps you benchmark a property’s operational efficiency against comparable properties and identify opportunities for improvement |
| Vacancy rate | Unoccupied leasable space divided by total leasable space (expressed as a percentage) | Reflects real estate demand growth or contraction, leasing performance, and potential revenue risk |
| Yield on cost (YOC) | Stabilized net operating income divided by total project cost (acquisition plus capital improvements) | Measures the return on development or value-add projects relative to their cost |
Real estate fund performance metrics across fund types
Different real estate investment strategies and fund types may warrant focusing on different performance metrics.
Core funds and stabilized yield metrics
Core funds are those that invest in high-quality, stabilized properties that have relatively low risk. As a result, investors expect stable cash returns, commonly evaluated via cash-on-cash return.
Core-plus and value-add funds
Core-plus funds have portfolios that blend stabilized properties with higher-risk, higher-return opportunities (the “plus”). Value-add funds focus on underperforming assets that have room for operational improvement. Since cash flows for both fund types can be irregular, many investors like to assess them by their IRR.
Opportunistic funds and high-risk analysis
Opportunistic funds focus exclusively on high-risk, high-reward real estate investments. These could include building projects and major renovations. Helpful metrics for assessing these funds include IRR and yield to cost (YOC).
Evaluation process: Applying metrics for strategic decision-making
Now that you’re familiar with fund performance metrics, here’s how to use them:
Portfolio-level vs. property-level metric aggregation
You can calculate return metrics at a portfolio level or a property level. Both provide valuable insights for investors evaluating a fund.
Comparing fund results against relevant industry benchmarks
Another way to use performance metrics is to benchmark them against market or asset averages. This tells you how a fund is performing compared to the competition.
Stress testing metrics under various market scenarios
Stress test your fund’s performance by adjusting key deal assumptions, such as interest rates, vacancy rates, and unexpected capital expenditures.
Ensuring data quality and accuracy for metric integrity
Performance metrics are only as good as the data they use. For accurate results, verify deal assumptions with independent third parties and maintain a thorough audit trail.
Common challenges in calculating and reporting real estate fund performance metrics
That said, calculating and reporting on fund performance metrics is easier said than done. Here are some common challenges you might face:
| Challenge | How to mitigate |
| Market volatility impact on net asset value (NAV) | A volatile real estate market can make it hard to report current net asset values (NAVs). To combat this, try basing NAVs on trailing averages or recent transaction comps. Whatever you do, disclose your methods. |
| Data inaccuracy or reporting delays in cash flow metrics | Inaccurate data or late reporting by investment property managers or other vendors can skew your cash flow metrics. To avoid this, consider automating data feeds with software like Agora and imposing penalties on vendors for delays. |
| Regulatory and compliance risks in metric presentation | Failure to comply with government reporting requirements, such as making proper disclosures, can hurt your business reputation and lead to legal challenges. Always have a legal professional review your fund performance reports before publishing. |
| Misinterpretation of IRR due to the timing of cash flows | Cash flows that change direction (positive and negative) multiple times can result in multiple valid IRRs, leading to ambiguous returns. Present IRR alongside other performance metrics to get a fuller picture. |
Best practices and technology for enhancing performance reporting
To improve your real estate fund performance reporting, follow these best practices:
Regular reporting and transparency
Establish a predictable reporting cadence with a standardized format, so investors know what to expect. Your performance reports should include both quantitative metrics and qualitative commentary with your expert insights.
Performance monitoring dashboards for real-time data
Instead of forcing investors to wait for quarterly reports, give them access to real-time performance data through online investor portal dashboards. This also helps minimize the number of performance-related inquiries you must answer.
Scenario modeling software for forecasting metrics
Run fund performance calculations under different assumptions with modeling software. This can give investors even more insight into the best, worst, and most likely investment outcomes.
Conclusion
Ultimately, effectively measuring real estate fund performance requires using multiple metrics. These can complement one another and help drive strategic investment decisions for you and your limited partners (LPs). Fortunately, calculating and reporting on fund performance is easier than ever with dedicated investment management software like Agora.
